John Peer and Jo Ann Montoya recently obtained summary judgment for an insurer client in a multi-million dollar contribution lawsuit. The underlying litigation involved the U.S. Department of Justice suit against Donald Sterling and his property management for discrimination in violation of the Fair Housing Act, 42 U.S.C. § 3601, et seq.
After paying to defend and settle the action, another insurer sought to recover from our client the approximately $9,000,000 in defense, indemnity and interest payments it had incurred to resolve the case.
Our client’s policies applied to discrimination “not done intentionally or at the direction of the insured” and required the discrimination to be caused by an “occurrence” defined as “an accident”. Based on arguments we presented, the federal district court agreed that the underlying lawsuit sought only damages for intentional discrimination and therefore our client had no duty to defend or indemnify. As a result, the excess insurer recovered nothing.
Kaiser Cement & Gypsum Corp. v. Ins. Co. of The State of Pennsylvania
Stacking of Limits/Exhaustion Issues
A significant decision issued April 8, 2013 by California's Second District Court of Appeal (Division Four), determined that an insurer which issued primary coverage through multiple policies over many years was not obligated to contribute more than a single policy's per occurrence limit in the context of progressive injury claims. In short, despite the Supreme Court's recent decision in State of California v. Continental Ins. Co., et al. (2012) 55 Cal.4th 186 expressly authorizing the "stacking" of policy limits, the appellate court held that under the specific language of primary policies Truck Ins. Exchange issued to Kaiser Cement over a 19 year period, Truck owed only one per occurrence limit for any single occurrence spanning some or all of that 19 year period.
Acknowledging the Supreme Court’s recent holding in State of California v. Continental that "stacking" of policy limits in a continuous exposure case was required, the Kaiser Cement panel nevertheless held that stacking could not be forced under the Truck primary policy language, which did not permit "stacking" of Truck's policies:
The 'limit of liability' portion of Truck’s policy limited Truck's liability for personal injury or property damage to $500,000 'Per Occurrence.' (Italics added). It further provides (part IV, 'Policy Period, Territory, Limits):
The limit of liability stated in this policy as applicable 'per occurrence' is the limit of the company's liability for each occurrence.
There is no limit to the number of occurrences for which claims may be made hereunder, however, the limit of the Company's liability as respects any occurrence involving one or any combination of the hazards or perils insured against shall not exceed the per occurrence limit designated in the Declarations. (Italics added).
The Kaiser Cement panel found this language sufficient to preclude stacking of Truck's policy limits.
For Truck and Kaiser Cement the net effect of the decision is that Kaiser Cement can continue to select the Truck 1974-1975 primary policy to respond to all asbestos claims involving Kaiser Cement so long as some portion of the injury process occurred during that year. For any liabilities exceeding $500,000 per occurrence (i.e., per plaintiff), however, Truck and Kaiser Cement will not be required to respond. Instead, ICSOP must satisfy any settlement or judgment against Kaiser Cement in excess of $500,000 unless ICSOP can establish that other Kaiser Cement primary insurers (for the period before 1964 or after 1983) actually provide coverage for that plaintiff's claim.
In all other instances, including for example the construction defect context, a primary insurer which issues coverage over multiple years should carefully review its policy language to determine whether the policy's "per occurrence" language in the limits of liability section or elsewhere effectively limits coverage for any progressive injury claim to a single occurrence limit. Please let me know if you would like a copy of the decision and call or write if you have questions or comments.
The Ninth Circuit Court of Appeal issued a significant decision on June 11, 2012 requiring – for the first time under California law – an insurer to initiate settlement negotiations once the insured's liability is reasonably clear, even in the absence of any settlement demand. The Du v. Allstate decision also concluded that the 'Genuine Dispute' doctrine applies only in the first party context.
Two of the court's most liberal members (Harry Pregerson and Susan Graber), joined with Northern District Judge Edward Chen (sitting by designation) in concluding that California law should provide that an insurer which fails to initiate settlement negotiations after liability becomes reasonably clear can face bad faith exposure whether or not the claimant ever made a settlement demand within (or outside) limits. Surprisingly, the rationale adopted by the Court was not necessary to its conclusion.
The case involved a straightforward auto accident with four injured claimants. Allstate issued a $100,000/$300,000 policy to the driver allegedly responsible for the accident. After the accident, Allstate sought evidence of medical damages from all four claimants. Following almost a full year with no release of medical specials to the insurer, counsel for the most severely injured claimant (Du) issued a $300,000 demand to settle for all four plaintiffs. Du documented his medical specials of over $100,000 at the time the global demand was issued. Allstate responded that it couldn't pay the full $300,000 because it had no medical or damage information for the other three plaintiffs, but suggested settlement of Du's claim separately. Du then rejected Allstate's offer of $100,000 as "too little, too late" and took the matter to trial, obtaining a $4,100,000 judgment.
Du took an assignment from the insured and sued Allstate for the full $4,100,000 judgment. At trial, Du asked for an instruction that suggested Allstate could be liable in bad faith for not initiating a settlement discussion during the one year period before the global demand was made. The trial court denied that instruction, finding California law required an unsatisfied settlement demand from the plaintiff for bad faith to lie. The trial court also found Du had failed to provide any factual support for the proposed instruction because Allstate had broached the issue of settlement at a sufficiently early point in the underlying litigation to render the instruction inapplicable.
The Ninth Circuit agreed with the trial court that plaintiff failed to lay the factual predicate for the instruction in this case and therefore affirmed the verdict. It nevertheless felt compelled to opine at considerable length on the "central legal issue": "Does an insurer have a duty, after liability has become reasonably clear, to attempt to effectuate a settlement in the absence of a demand from the claimant?" (2012 DJDAR at 7706).
The Ninth Circuit recognized that two earlier California cases had held that an unsatisfied settlement demand from plaintiff was a prerequisite for a bad faith action. It nevertheless concluded that the clear statement to that effect in Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 877, must be considered dicta. Similarly, it found that language in Coe v. State Farm Mutual Ins. Co. (1977) 66 Cal.App.3d 981, which held that "actionable bad faith arises, not from an insurance carrier's obligation to settle, but from unwarranted failure to accept a reasonable settlement offer", also was dicta because the central theory of that case was the failure to accept a deficient demand.
Instead, the Ninth Circuit relied for support on Boicourt v. Amex Assurance Co. (2000) 78 Cal.App.4th 1390, which expressly did not decide the issue. The Boicourt decision actually dealt with an insurance carrier's failure to respond to a request from the plaintiff for identification of the policy limits. (Id., at 1392). Boicourt held that this conduct essentially foreclosed the claimant from making any settlement demand and therefore a finding of bad faith, based on the failure to advise the claimant of the policy's limits or even to ask the insured for permission to disclose those limits, could provide the basis for a finding of bad faith. Although the Boicourt panel also agreed that the discussion in Merritt was dicta, it expressly did not decide that failure to initiate settlement discussions could constitute bad faith. (Id., at 1399-1400).
Second, we are not importing the statutory requirement that liability insurers settle cases when the liability of their insured's is reasonably clear…into the substantive law of bad faith.
Third, we do not explore the degree to which the implied covenant of good faith and fair dealing imposes on a liability insurer a duty to be 'proactive' in settling case, except to say that an insurer's blanket rule against contacting the policyholder to see if the policyholder wants the policy limits can be a basis for bad faith. (Id.)
The Ninth Circuit in Du v. Allstate showed no such hesitancy in declaring that "an insurer can violate the duty of good faith and fair dealing by failing to attempt to effectuate a settlement within policy limits after liability has become reasonably clear." To avoid potential bad faith, the insurer must attempt to settle a claim by making, and by accepting, reasonable settlement offers once liability has become reasonably clear." (Id., at 7708) (emphasis in original).
Having decided this issue unnecessary to the outcome, the Ninth Circuit then gratuitously added that the "Genuine Dispute" doctrine would not have applied to protect Allstate (if it otherwise had been found in bad faith), because that doctrine simply does not apply to third party claims.
Should the decision be followed by California courts, it represents a dramatic shift of exposure for insurance carriers in California. Until now, an insurer was protected from bad faith exposure during the time period before a claimant made an offer to settle. Only when the insurer received a demand within limits would settlement obligations commence. If Du v. Allstate becomes the law in California, insurers must assess whether their insured's liability is reasonably clear at the outset and presumably at least commence settlement negotiations through an offer shortly after that decision is reached or face bad faith exposure.
We will continue to monitor developments.
In Gray v. Damion Begley and Granite Construction Company, John assisted an insurer client in obtaining a set-off for the full amount of a $4,500,000 verdict against an insured. Following a serious automobile accident, the insurer paid $8,100,000 on behalf of its corporate insured, but refused to settle on behalf of the employee driver who caused the accident while driving under the influence of alcohol in violation of corporate policy. Following the $8,100,000 settlement with the employer, the injured plaintiff proceeded to trial against the driver and obtained a $4,500,000 verdict. The driver then entered into a collusive settlement with the plaintiff and refused to allow his attorney to pursue a set-off motion.
The insurer then brought John in to handle the situation. John first filed a request on behalf of the insurer to intervene in the trial court action to prosecute a set-off motion. After the trial court denied the insurer's set-off motion, John filed an appeal with the Second District Court of Appeal. In a very lengthy published decision, Gray v. Begley (2010) 182 Cal.App.4th 1509, the Court of Appeal reversed the trial court and held that the insurer's intervention in the trial court was proper and the court should have allowed the insurer to pursue its own set-off motion and to establish that the agreement between the driver and the plaintiff was collusive.
Following remand, earlier this year John successfully established the insurer's right to a complete set-off for the full amount of the $4,500,000 jury verdict and established that the agreement between the driver and the plaintiff was collusive. As a result, the insurer avoided the $4,500,000 judgment against the driver, whose bad faith claim against the insurer was then dismissed with prejudice.